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Have you been tossing around the idea of refinancing your mortgage, or any loan for that matter? If you’re like me, you’ve heard of refinancing, but that’s about it. Some people say it will save you money and some say it’s a bad idea. So which is it? And what is it? Let’s explore refinancing together!
When you refinance your mortgage, you replace your old mortgage with a new one. Your financial institution purchases the remainder of your mortgage from the original institution and gives you a new one. There are multiple reasons this can come in handy, but the main benefits are lower interest rates or a shorter payment term and the option to borrow money on top of the new mortgage. This is why there are two types of refinancing: Rate and term and cash-out.
Rate and term refinancing is when you refinance a home loan to get a lower interest rate or a shorter payment term. This can be beneficial if you’ve recently increased your income and want to pay off your house faster. It’s also useful if interest rates have gone down. All of this is done without adding more money onto an existing loan, which is what cash-out refinancing does.
Cash-out refinancing can help you get a large lump sum of cash fairly quickly. However, it’s not always a great idea. Basically, when you choose cash-out refinancing, you are adding money to your existing loan. While you get that money immediately, your loan costs more and has a higher interest rate. This type of refinancing is most often used for home improvements.
So what are the pros and cons of refinancing a mortgage?
It is definitely a pro to take advantage of low interest rates when you can. Refinancing also allows you to lock in a low interest rate by switching from an adjustable rate to a fixed-rate. You can also tailor your monthly payments to be lower or higher, depending on what you’re looking for. And, for those times you need some extra cash, like paying for college or remodeling your home, you can access it without having to pay on a separate loan each month.
However, there are cons to refinancing a loan as well. To begin with, there are costs associated with refinancing. You’ll still need to pay closing costs, which can range between 3% and 6% of the total loan balance. There is also a fair amount of paperwork that goes into refinancing a loan. You’ll need to be prepared to spend some time completing those documents. And even then you may not be approved, especially if you’ve had a major employment or credit change.
If you’re considering refinancing a loan, reach out to one of our awesome loan officers. They can help you weigh the pros and cons so you can decide what is best for your financial goals.
Good luck out there! Mortgages can be confusing. It our job to make them easy for you. And we take that job very seriously.